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Proposed regulations could force banks to boost IT spending

Changes to international reporting regulations could compel banks to spend tens of millions of pounds on technology in the next few years.

The purpose of the regulations is to gather data and create credit and operational risk management models for government oversight. But there could be a lot of resistance, based on preliminary feedback from senior banking executives and IT managers.

The forthcoming Basel Capital Accord is expected to be finalised by the Bank for International Settlements (BIS) in Basel, Switzerland, by the end of this year.

Some organisations will then have to build databases, reporting systems and integration technologies such as extraction, transformation and loading technologies to take advantage of proposed risk management standards, according to a report from Meridien Research.

The new accord, unlike current regulations, will address requirements for information systems and is expected, for the first time, to require banks to set aside capital for operational risks, according to the report.

While many major financial institutions throughout the world have enterprise risk systems in place, "few of those systems are capable of automatically generating regulatory reporting," Meridien's report states.

The BIS's recommendations are expected to be adopted by international regulators sometime around 2006. Because that is still four years away, many IT managers and business executives believe there's no rush to build systems for tracking and reporting credit and operational risks, said Debbie Williams, research director at Meridien. That is a mistake, she said.

"It could very well take the next four years to get [all of the needed systems] in place," Williams said. "It's not just a question of creating a database and populating it. This could mean a change in business practices as well."

The BIS coordinates regulations in financial services. Its board makes recommendations on industry rules, which are then adopted around the world.

In January 2001, the BIS's Basel Committee on Banking Supervision issued a proposal for a new Capital Accord. Once finalised, it will replace one issued in 1988 that required banks to set aside at least 8% of their capital to cover their credit risks even if some loans were less risky than others.

The new accord offers banks an opportunity to create a tiered, internal ratings-based model that many firms already use. The new reporting model allows them to set aside less capital, based on a customer's credit ratings and other factors.

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